interest rates

The most newsy point from NY Fed president William Dudley’s speech today was his call for a change in exit strategy, urging the central bank to reinvest in its mortgage portfolio. But there was a lot more going on in the speech: Mr Dudley put a dovish spin on the Fed’s inflation target. He said bank regulation may be driving down neutral interest rates, and he put markets on notice that how they price bonds will decide how the Fed changes interest rates.

(1) Inflation is coming

Mr Dudley’s tone on inflation was different to the isn’t-it-worringly-low type of remarks that Fed officials have tended to make recently. Instead, he expects inflation to head upwards, and seemed to be testing arguments for why Fed policy should not react.

“With respect to the outlook for prices, I think that inflation will drift upwards over the next year, getting closer to the FOMC’s 2 percent objective for the personal consumption expenditure deflator . . . That said, I see little prospect of inflation climbing sharply over the next year or two. There still are considerable margins of excess capacity available in the economy—especially in the labor market—that should moderate price pressures.”

When we look back on the FOMC meeting on June 19 2013, it will probably be seen as the moment when the Fed signalled that it was beginning the long and gradual exit from its programme of unconventional monetary easing. The reason for this was clear in the committee’s statement, which said that the downside risks to economic activity had diminished since last autumn, presumably because the US economy had navigated the fiscal tightening better than expected and the risks surrounding the euro had abated.

This was the smoking gun in the statement. With downside risks declining, the need for an emergency programme of monetary easing was no longer so compelling. The Fed has been the unequivocal friend of the markets for much of the time since 2009, and certainly ever since last September. That comfortable assumption no longer applies. Read more

Last week anti-capitalist protesters outside the European Central Bank were dominating (at least the local) news in Frankfurt, this week it was the turn of the policymakers inside the building. The ECB is keeping its rates on hold at 0.5 per cent and Mario Draghi, president, has been quizzed on where the eurozone is headed.

The ECB staff’s quarterly economic forecasts have been tweaked, so this year’s contraction is greater than previously forecast at 0.6 per cent and next year’s growth forecast creeps up to 1.1 per cent (but then a year is a long, long time in economic forecasting.)

Hello and welcome to the FT’s live blog on the European Central Bank’s rate decision and press conference. All eyes on Thursday are on the ECB and what it has left in its tool kit as gloomy data throws further doubt on the recession-bound eurozone economy.

Many economists are expecting what would largely be a symbolic cut in interest rates. The governing council’s vote is due at 12.45 (BST) and ECB President Mario Draghi will meet the press at half past one.

Mark Carney, the incoming governor of the Bank of England, was grilled by MPs and his ECB counterpart Mario Draghi faced awkward questions. By Tom Burgis, Ben Fenton and Lina Saigol in London with contributions from FT correspondents. All times are GMT.

The ECB normally publishes transcripts of these on its website but has not done so this time, presumably because the interview with Germany’s Frankfurter Allgemeine Zeitung was conducted just before he formally took up post. So as a service to Money Supply readers, here are some of the highlights.

Mr Mersch attempted to pour cold water on speculation that a cut to the ECB’s main refinancing rate (currently 0.75 per cent) is imminent. Read more

Martin Weale’s speech today shows how far the policy debate has shifted at the Bank of England. As recently as early July, this external member of the monetary policy committee was voting for higher interest rates. Now he is openly talking about restarting quantitative easing.

Mr Weale should certainly be praised for being as good as his words. In March he said he was perfectly happy to change his mind if the facts changed and he has done so. No longer voting for a rate rise does not indicate a previous error of judgment, only that circumstances have changed.

From his speech today, Mr Weale, one of the more hawkish MPC members, now clearly thinks that UK QE2 might be necessary and he believes it would work. Read more

The first six months of 2011 have been most uncomfortable for the Bank of England. The combination of overshooting of inflation and weakness of growth really brings out the inner-hawks and inner-doves on the Monetary Policy Committee.

Do they react to the rise in price pressures seeming to come from weakness in supply? Do they assume price rises are temporary and respond to what they see as a shortfall in demand? Or do they sit on the fence?

The fence sitters have won the day so far on the MPC. But today’s inflation figures give some ammunition to the doves. The fall in CPI inflation to 4.2 per cent in June (from 4.5 per cent) ensures there was no overshoot in inflation in the second quarter relative to the Bank’s may inflation report.

Much of inflation’s still high level reflects price rises quite a long time ago, so it makes sense to look (below) at a chart of annualised quarter-on-quarter inflation with rudimentary seasonal ajustment to see whether the inflation scare is past.

I drew this chart so blame me if it makes no sense, but it also gives some succour to doves. Read more

Economists are now following in investors’ footsteps with Barclays Capital becoming the latest group of forecasters to push back their forecast of a rate rise from November 2011 to May 2012, arguing that “policy [is] paralysed by domestic double dip” fears.

As I argued in the Financial Times last week, investors have got ahead of themselves a little and the balance on the MPC is rather more delicate. It could easily tip towards a rate increase, particularly if Charlie Bean swung into that camp. Based on their recent words, here is my guide to the MPC members’ views, from the most dovish to the most hawkish.

As you can see, there is quite a delicate balance on the MPC. It could easily tip 5-4 to a rate rise. Getting a majority in favour of QE2 appears much more difficult at present. Read more

All eyes were on the Bank of England minutes of the June Monetary Policy Committee to see whether the replacement of Andrew Sentance with Ben Broadbent would change the balance on the Committee. It did.

Mr Broadbent voted with the majority not to tighten monetary policy, removing one hawkish voice. The Committee is now broadly split 7-2 against tighter monetary policy. Mr Broadbent’s vote was the first dovish tilt apparent in the minutes. Compared with the harsh Mr Sentance, who voted vehemently for rate rises every month most recently seeking a 0.5 percentage point rise, Mr Broadbent is very cuddly indeed.

Charlie Bean, deputy governor of the Bank of England, has been seen as one of the swing voters on the Monetary Policy Committee. If he is one of the people who would have to vote for a rate rise, he does not seem like he is itching to pull the trigger any time soon.

In the speech he has just delivered in Northern Ireland, he thinks the signs of limited supply capacity and poor productivity is nothing more worrying than “puzzling”, he notes that there are persistent output losses after banking crises, is not too concerned about inflation or inflation expectations, but sounds most upset about the weakness in demand at the moment.

Worries about demand weakness with puzzlement about supply is not what constitutes a rate hiker. That rate rise might be on hold a bit longer. Read more

Ben Broadbent, the new member of the Bank of England’s Monetary Policy Committee, is just about to start his confirmation hearing in Parliament (more later). But he will have to deal with today’s inflation figures for April, which have pushed CPI inflation up to 4.5 per cent from 4 per cent in March as shown in the picture.

But though Mr Broadbent did not know the following, he had little need to worry. The April CPI is heavily distorted by the timing of Easter and its effects on air fare prices. Some 0.36 percentage points of the 0.5 percentage point rise in inflation has come from air fares. Read more

The European Central Bank’s fears about inflation appear to be materialising. Eurozone “core,” or underlying, inflation has reached the highest level in more than two years, according to Eurostat, the European Union’s statistical office. Excluding volatile energy and unprocessed foods, consumer prices rose at an annual rate of 1.8 per cent in April – up from 1.5 per cent in March and the highest since January 2009. The surge suggests higher headline inflation rates caused by commodity prices are feeding through into broader price pressures.

The late timing of Easter might have distorted the figures by delaying usual price-cutting offers. The ECB is also not a big fan of “core” measures, which it sees lagging indicators of underlying trends. Jürgen Stark, executive board member, once described them as “well suited for central bankers who don’t eat or drive”. Read more

Mervyn King was in typically subdued form, presenting yet another inflation report in which the Bank of England has revised higher its forecast for inflation and revised lower its forecast for growth.

As I will go on to explain, the Bank has significantly revised its growth forecasts lower – losing about 1 year of growth at current rates since February’s forecast – but the Bank governor was rather reticent to spell this out.

The “big picture”, he said, is that the Monetary Policy Committee’s “medium term judgment is broadly the same” as it was in February. I will come back to this, but the governor was looking at a particular way of reading the Bank’s forecast growth rates in 2013, not the level of output. As he is the first to assert, it’s the levels that matter, stupid, not the growth rates.

The level of output the Bank believes is sustainable has declined a lot in the latest forecast. I have a pretty good record of decoding the Bank’s pictorial forecasts and I estimate the Bank has reduced its central forecast for the level of output in Q1 2014 by 1.7 per cent. At current growth rates, we seem to have lost a year of growth in forecast revisions.

Before I show some forecast charts, here are the answers to my questions from last week we learnt from the governor this morning.

1) How permanent does the MPC judge the winter slowdown to be?Read more

Yesterday’s decision to keep monetary policy on hold in the UK was such a foregone conclusion that it barely made ripples. But predictability does not mean the Bank and economists are equally calm beneath the surface. Rather, they are furiously paddling to try to work out what on earth is going on with the British economy.

Here, I will try and present a pretty neutral post on the current outlook, against which to judge next week’s Bank of England Inflation Report.

The European Central Bank has left its main interest rate unchanged at 1.25 per cent but is expected to confirm a bias towards another increase in coming months as it combats surging eurozone inflation.

The decision to hold fire on Thursday was expected. Jean-Claude Trichet, president, prefers not to surprise financial markets. However, at its meeting in Helsinki, Finland – one of two occasions each year when it gathers outside its Frankfurt home – the ECB’s 23-strong governing council is thought to have plotted the timing of its next move. Read more

Rate normalisation continues in the Philippines, despite the Japanese earthquake. Key rates have been increased by a quarter of one per cent, with the overnight lending (repo) and borrowing (reverse repo) rates standing at 6.5 and 4.5 per cent, respectively. Manila started raising rates only recently: the last rate rise – a quarter point in March – was the first since 2008.

“In deciding to increase policy rates anew, the Monetary Board noted that the latest baseline inflation forecasts continue to suggest that the 3-5 percent inflation target for 2011 remains at risk, mainly as a result of expected pressures from oil prices,” said the Bank. Annual inflation in the year to April edged up to 4.5 per cent, within the government target but at the upper end.

The Money Supply team

Chris Giles has been the economics editor of the Financial Times since 2004. Based in London, he writes about international economic trends and the British economy. Before reporting economics for the Financial Times, he wrote editorials for the paper, reported for the BBC, worked as a regulator of the broadcasting industry and undertook research for the Institute for Fiscal Studies. RSS

Claire Jones is the FT's Eurozone economy correspondent, based in Frankfurt. Prior to this, she was an economics reporter in London. Before joining the Financial Times, she was the editor of the Central Banking journal. Claire studied philosophy and economics at the London School of Economics. RSS

Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking. RSS

Sarah O’Connor is the FT’s economics correspondent in London. Before that, she was a Lex writer, covered the US economy from Washington and the Icelandic banking collapse from Reykjavik. Sarah studied Social and Political Sciences at Cambridge University and joined the FT in 2007. RSS

Ferdinando Giugliano is the FT's global economy news editor, based in London. Ferdinando holds a doctorate in economics from Oxford University, where he was also a lecturer, and has worked as a consultant for the Bank of Italy, the Economist Intelligence Unit and Oxera. He joined the FT in 2011 as a leader writer. RSS

Emily Cadman is an economics reporter at the FT, based in London. Prior to this, she worked as a data journalist and was head of interactive news at the Financial Times. She joined the FT in 2010, after working as a web editor at a variety of news organisations.
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Ralph Atkins, capital markets editor, has been writing for the Financial Times for more than 20 years following an economics degree from Cambridge. From 2004 to 2012, Ralph was Frankfurt bureau chief, watching the European Central Bank and eurozone economies. He has also worked in Bonn, Berlin, Jerusalem and Brussels. RSS

Ben McLannahan covers markets and economics for the FT from Tokyo, and before that he wrote Lex notes from London and Hong Kong. He studied English at Cambridge University and joined the FT in 2007, after stints at the Economist Group and Institutional Investor. RSS